Introduce

The ultimate goal of the technical analysis process is for the Trader to estimate the relatively correct direction of the market and determine the time of a reversal (entry time) correctly. Therefore, all tools in the technical analysis must be aimed at fulfilling this goal.

But, the divergence - divergence signals used a lot by Traders to determine a reversal point is an unstable tool. Trading divergence is the difference in the direction of the price versus the direction of the indicator; For example, a bearish divergence - a bearish divergence with a chart creates higher highs while the indicator creates lower highs giving the trader the possibility of a market reversal in the future.


A typical divergence signal, but the price does not reverse strongly

All divergence trading signals are considered a good reversal trading signal, but their characteristics are often quite contradictory during your analysis from a technical analysis perspective, for example. It will be very difficult to determine which is the bottom or top of the price/indicator on the chart, so many traders find it confusing to use divergences to enter orders.

Market divergences are evaluated by comparing prices with a variety of technical analysis tools. The most common examples are used in oscillating indicators such as CCI, Stochastic, RSI, MACD, AO.

The trend of a trend is usually determined by the MA line or trend line. The larger the difference between the price and the indicator, the higher the possibility of a reversal (according to the theory of divergence).

Let's review a bit about the types of market divergence in the illustrative examples below.

Regular Divergence - Type A 

Divergence This is the way to identify the classic divergence that the Trader brothers also called the normal divergence.


Some real-life examples on the price chart below:


Price creates higher highs, the indicator creates lower highs - the bearish divergence


Price creates lower lows, the indicator creates higher lows - bullish divergence

Class B Divergence (Closed Divergence)

Closed Divergence is a Divergence with weaker signals, signaling the continuation of the trend.


Signal divergence pattern B


The price makes higher highs, the indicator makes lower highs

Divergence C - Most Unsustainable Divergence

The market is in an uncertain condition, before moving to the stage of prospect, waiting for market speculation.

The oscillating indicators introduced here show the slowing down of the market price, the dynamics of the market price seem to be extinguished and the trend has shown signs of exhaustion. This is the weakest signal in the form of a divergence, encouraging you to read, but the trade should not.


Divergence type C is the signal Divergence has an indicator forming a 2 top 2 bottom pattern

Real-life chart example:


Divergence is a mathematical conceptual signal and it calculates the change of an indicator which itself depends on the market price, so you can apply it to many different market types.